PulteGroup, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. PulteGroup is a U.S. homebuilder with mortgage, title, and insurance brokerage operations. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Prior year | Six months 2021 | Prior year |
|---|---|---|---|---|
| Total revenue | $3.36 billion | $2.59 billion | $6.09 billion | $4.89 billion |
| Net income | $503.4 million | $348.6 million | $807.5 million | $552.3 million |
| Diluted EPS | $1.90 | $1.29 | $3.03 | $2.03 |
| Homebuilding pretax income | $588.0 million | $396.6 million | $915.7 million | $640.8 million |
| Financial Services pretax income | $51.5 million | $60.4 million | $117.8 million | $80.0 million |
- Q2 home sale revenue rose 31% to $3.24 billion; closings increased 22% to 7,232 and average selling price rose 7% to $447,000.
- Home sale gross margin was 26.6% in Q2 and 26.1% for the first half, up 270 and 230 basis points, respectively. SG&A was 8.4% of home sale revenue in Q2 and 9.3% year to date.
- Operating cash flow was $432.1 million for the first half, versus $807.9 million a year earlier. The 2021 result included a $632.6 million increase in inventories, partly offset by net income of $807.5 million.
- Cash, cash equivalents, and restricted cash totaled $1.72 billion at June 30, down from $2.63 billion at year-end. Unrestricted cash was $1.66 billion.
- Notes payable were $2.05 billion, down from $2.75 billion at year-end. Debt to total capitalization, excluding Financial Services debt, was 22.7%, versus 29.5%. The company had no revolving-credit borrowings and $739.1 million of unused availability after letters of credit; it reported covenant compliance.
- First-half financing outflows included $797.4 million of debt repayments, $353.7 million of share repurchases, and $74.9 million of dividends. Q2 dividends declared were $0.14 per share.
Changes and operating trends
- Q2 total revenue increased 30% and net income increased 44% year over year. First-half revenue increased 25% and net income increased 46%.
- New orders rose 28% in Q2 and 30% year to date; the cancellation rate fell to 7% and 8%, respectively, from 19% and 16%. June 30 backlog increased 52% in units to 20,056 homes and 70% in dollars to $9.85 billion.
- Financial Services pretax income fell 15% in Q2, primarily because competition reduced revenue per loan, but increased 47% for the first half on higher volume. The six-month mortgage capture rate was 86.9%.
- The company retired $426.0 million of notes due in March 2021 and used a tender offer to retire $200.0 million due in 2026 and $100.0 million due in 2027. The early tender resulted in a $61.5 million first-half loss on debt retirement.
Outlook, commentary, and risks
- Management described housing demand as very strong and remained optimistic about future demand and business expansion, but provided no specific numerical earnings or revenue guidance in the filing.
- Supply-chain constraints, labor and materials availability, and delays in municipal approvals and inspections extended production cycles by roughly two weeks in most markets. The company increased starts and staffing but moderated lot releases and order pace in many communities to manage backlog durations.
- Management said lumber prices had declined from their mid-2021 peak but remained above historical norms; availability and costs for trusses, oriented strand board, windows, siding, and appliances remained challenging. Pricing actions had so far more than offset cost increases, but the company cautioned that inflation or materially higher mortgage rates could pressure affordability, revenue, margins, and earnings.
- Active communities continued to decline as openings lagged closings; management did not expect a meaningful increase until 2022. Land options had $4.76 billion of remaining purchase price, with $326.9 million of deposits and pre-acquisition costs at risk; most agreements can generally be canceled at the company’s discretion.
- Other notable exposures include $1.7 billion of surety bonds and $260.9 million of letters of credit. Management did not expect a material amount to be drawn. Recorded self-insured reserves were $620.6 million, including significant estimates for incurred-but-not-reported claims; actual claim costs could differ materially. Warranty liabilities were $87.8 million.
- The Financial Services repurchase agreement, with $352.6 million outstanding and a $375 million commitment, was due to mature July 29, 2021. The company said it believed liquidity was adequate but noted renewal or replacement on commercially reasonable terms was not assured.
- COVID-19 effects, housing demand, interest rates, land and construction costs, labor availability, insurance, and legal or regulatory matters remain among the risks identified by the company. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether backlog converts to closings as expected, given the production delays and the company’s decision to moderate order pace.
- Whether pricing continues to offset labor, materials, land, and financing cost increases without weakening demand or margins.
- Subsequent status and terms of the July 29, 2021 Financial Services repurchase-agreement maturity.
- Future changes in self-insured reserves, insurance recoveries, warranty claims, and the related actuarial assumptions.
- Capital allocation after $353.7 million of first-half repurchases and the Board’s additional $1.0 billion authorization.
- Debt-retirement effects and cash use: the $61.5 million loss is included in first-half results, while cash and inventory movements materially affected liquidity and operating cash flow.